Life Insurance Basics
Underwriting and the application
Field underwriting starts the file: the producer collects complete, honest information. Part I covers general data and the agent's report; Part II covers medical history. An attending physician's statement and the MIB (a coded database of prior applications) support the decision. Insurable interest must exist at application, not at death. Outcomes are standard, preferred, substandard (rated, excluded, or modified), or declined.
Delivery and the receipt
With a conditional receipt, coverage begins when the completed application and initial premium are received, provided the proposed insured proves insurable under the stated conditions. A binding receipt gives immediate coverage. Distinguish the policy date from the delivery date; limited backdating (usually up to six months) lowers the age band and premium but builds immediate cash value.
Premiums and taxation
Premium equals mortality plus interest plus expenses. Annual mode is cheapest; monthly is most expensive. Death benefits are generally income tax free, cash value grows tax deferred, and policy loans are not taxable unless the policy lapses with unpaid interest. A modified endowment contract (fails the 7-pay test) loses favorable treatment: gains are distributed first and a 10% penalty applies before age 59½.
Ownership and beneficiaries
The owner controls the policy, not the insured. Designations may be primary or contingent, revocable or irrevocable; per capita splits equally among survivors while per stirpes splits by branch. Know the common disaster clause, spendthrift clause, and the need for a trustee or guardian when a minor is named.
Rule of thumb: when asked when coverage began, check the receipt language and the date the completed application and initial premium changed hands - not the date of the medical exam.